Instruction
One of the topics we covered is diversification. The idea behind diversification is that if you spread your investment dollars around to various investments, if one goes down, the others will protect you from losing everything and if you diversify perfectly, the other investments may move in the opposite direction, so that your gains offset your losses. So maybe some of your investments produce positive returns, while others are losing money.
But what if a particular stock produces huge gains? Consider Facebook. Its IPO was at the May 18, 2012 and the stock opened at a price of about $38. As of Dec 2013, the stock was trading at $54.65 a share. So if you had $100,000 to invest and you put it all into Facebook at the IPO, your investment was worth about $144,000 a year and a half later – a gain of $44,000 in about 20 months! But what if you had diversified and put only $20,000 in Facebook and you invested $80,000 in other stocks? At the end of 2013, your Facebook stock was worth about $29,000 and so you only gained about $9,000 on Facebook, as opposed to $44,000 if you invested all your money in Facebook. May 18, 2018 marked the 6 year anniversary since the IPO, check out the stock price. Would you be kicking yourself?
This story is incomplete in order to feed the discussion that I hope will occur in this DB. I would be impressed if you went to Yahoo Finance, click on “max” for the graph and used what you see to help you form your posts for this DB. So, what are you feelings? If you had diversified and the one stock made very large gains (Facebook in my example), would you experience FOMA (fear of missing out) because you made $9,000 rather than $44,000? Would you be cursing me and any other financial person who suggests that diversification is a good thing? Or would you be glad you had diversified anyway, even though, on this particular occasion, you did not make as much money as you would have if all of your money was invested in that one stock?